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Tesla earnings miss expectations, shares slip

Tesla (TSLA) posted lower-than-expected earnings in the fiscal fourth quarter but eked out a second consecutive quarter of profitability, underscoring its ongoing struggles to sell affordable electric vehicles at scale.

CEO Elon Musk also announced during a call with investors Wednesday that Tesla CFO Deepak Ahuja is retiring, and will be replaced by Zach Kirkhorn, previously vice president of finance.

The carmaker delivered adjusted earnings of $1.93 per share for the fourth quarter, falling below consensus estimates of $2.14 per share, according to Bloomberg data. GAAP net income of $139 million fell short of estimates of $182.5 million, but was impacted by a $54 million non-cash charge, the company said.

However, Tesla exceeded expectations on the top line and posted fourth-quarter revenue of $7.23 billion, ahead of $7.07 billion estimated. In the year-ago quarter, Tesla posted a loss of $3.04 per share on revenue of $3.29 billion.

Based on management’s previous commentary, results for the fiscal first quarter could also come in soft. On Jan. 18, CEO Elon Musk said in a company blog post that shipments of higher-priced Model 3 variants to Europe and Asia in early 2019 would “hopefully allow us, with great difficulty, effort and some luck, to target a tiny profit” in the current quarter. Tesla reiterated these hurdles to fiscal first-quarter profitability in its earnings statement Wednesday, and Musk said on a call with investors Wednesday that he is “optimistic about being profitable in Q1” but “not by a lot.”

However, the company said in its statement announcing results Wednesday that it expects to have positive GAAP net income and free cash flow in every quarter beyond the fiscal first quarter of 2019.

In the fiscal fourth quarter, the company’s free cash flows increased to $910 million, better than the $881 million it had posted in the third quarter. Tesla’s cash and cash equivalents also increased by $718 million from the third quarter to $3.7 billion.

Shares of Tesla slipped 3.05% to $298.88 each as of 6:36 p.m. ET.

Investors heading into Wednesday’s results carried concerns about sales for Tesla’s higher-priced, more profitable vehicles. This week, Tesla began selling lower-priced versions of its higher-priced Model S and Model X vehicles, each with the same long-range 100 kWH battery packs, in an attempt to streamline future production.

Earlier this month, Tesla said it would stop making Model S and Model X vehicles with a 75 kWh battery pack, which had starting prices of $76,000 and $82,000, respectively – thereby setting new prices at the time at less-accessible $94,000 and $97,000 entry points. But with the new 100kWh models, the lowest-price Model S vehicles start at $85,000, while the lowest-price Model X will cost at least $88,000, with the option to pay an additional $8,000 to add about 8% more driving range.

Tesla shares sank the first trading session of 2019 after the company said it was cutting its prices across vehicles by $2,000 in the U.S. The move was intended to help absorb the reduction in the federal electric vehicle tax credit, which halved to $3,750 from $7,500 as of January 1. The tax credit will be slashed again to $1,875 this summer, shrinking a key incentive for potential electric vehicle buyers.

The Palo Alto, California-based company has struggled to find a pricing mix that is both accessible to consumers and profitable for the company as it tries to ramp up deliveries.

“As we continue to improve the production rate of Model 3, the cost per vehicle continues to decline. It is critical that we continue this trend so that we can keep increasing the affordability of Model 3 while retaining a sustainable level of profitability,” the company said in a statement announcing quarterly results. It added that despite recently introducing a lower-priced mid-range variant and other headwinds, gross margins for the Model 3 “remained stable” in the fourth quarter at more than 20%.

Musk during a call with investors Wednesday said that “demand for the Model 3 is insanely high – the inhibiting issue is affordability.” He estimated that global demand for the Model 3 in a strong economy is between 700,000 to 800,000 units per year.

Tesla’s fourth-quarter Model 3 deliveries of 63,150, announced earlier in January, came in slightly below consensus estimates of 63,700. Total deliveries for the quarter were 90,700, also falling short of some estimates on Wall Street. Total fourth-quarter production grew 8% from the third quarter to 86,555 vehicles.

Tesla announced Wednesday that it sees 2019 total deliveries in the range of 360,000 to 400,000. The company said it is targeting annual Model 3 production of more than 500,000 sometime between the fourth quarter of 2019 and the second quarter of 2020. This projection is slightly behind schedule when compared to Musk’s previous commentary in mid-2017, when he had asserted that investors should have “zero” doubt that Model 3 production would hit 10,000 per week in 2018.

Earlier this month, Tesla CEO Elon Musk sent a letter to employees announcing the company was slashing its full-time staff by about 7%, or approximately 3,000 positions. Tesla’s staff had increased by 30% in 2018, which Musk said was more than the company could support as it seeks to reduce costs.